Industrial  Organization  (ECON  235)
Spring  2016
Monday  and  Wednesday  10:30  am  –  11:50am
Instructor:  SangMok  Lee
This   course   is   intended   to   introduce   you   to   various   industrial   organizational   structures   and   problems,   including   monopoly,   oligopoly,   nonlinear   pricing,   and
price  discrimination.  These  theories  are  used  to  model  various  industries,  antitrust   cases,  and  regulatory  issues.
Course  Logistics
Office  hours:  Tuesday  1:30-­‐3:30pm  (Until  Feb  9)/  Tuesday  1-­‐3pm  (From  Feb  16).
Office:  McNeil  462
Email:  sangmok-­‐at-­‐sas.upenn.edu
Teaching  Assistant:  Hanna  Wang  (hannaw@sas.upenn.edu)
TA  Office  Hours:  Thursday  10am  -­‐12pm  (314-­‐5r  McNeil)
We  will  use  Canvas  for  announcements,  handouts,  notes,  homework  assignments
etc.
Course  Description
Prerequisites:   Econ   101   (Intermediate   Micro   Theory),   Math  104   and   either   Math
114   or   Math   115   (Calculus   Part   I   and   II).   Econ   103(Statistics   for   Economists)   and
Econ  212  (Game  Theory)  are  recommended.
Textbooks:  There  is  no  textbook  for  this  class.  I  will  distribute  standalone  lecture   notes,   supplemented   by   papers   and   handouts.   The   following   textbook   is   only
recommended.
-­‐   Industrial   Organization:   Contemporary   Theory   and   Practice ,   Thompson   &   South-­‐
Western,  Fourth  edition,  by  Pepall  L.,  Richard  D.  and  G.  Norman.
-­‐  Modern  Industrial  Organization :  Harper/Collins,  by  D.  Carlton  and  J.  Perloff.
Requirement  and  Grading  Policy
1 .  Grades
Two  midterm  exams
One  final  exam
Term  Paper
2  x  30%
1  x  20%
1  x  20%
Due/Exam  dates
Mar  2,  April  11  (class  time)
May  2,  12  -­‐  2pm
Submit  with  the  final  exam
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2.   Exercises will be assigned from time to time during class. It is in your interest to complete the exercises, even though they will not be collected or graded. You can discuss your answers during office hours. Also, there will be TA sessions about a week before
each exam.
3.   Examinations   will  be   in-­‐class  and   closed-­‐book .  Collaboration  on  the  examinations   is   prohibited.   If   you   miss   one   mid-­‐term   exam,   with   a   compelling   and   verifiable   reason,  the  final  exam  and  the  term  paper  will  make  up  40  and  30  percent  of  your   total  grade.  A  request  for  a  re-­‐grade  of  an  exam  must  be  submitted  to  me  in  writing   with  the  original  bluebook,  in  which  case  I  will  reevaluate  your  complete  homework
set  or  exam.
4.   Term  paper  will  be  to  find  and  study  real  world  examples  of  the  phenomena  we   discuss  in  this  class.  Two  progress  reports  will  be  required  to  submit  along  with  the   midterm  exams.  The  paper  should  not  exceed  15  pages  with  1.5  spacing,  including   references,  tables,  figures,  cover  page  (if  you  want  to  have  any),  whatsoever.
Students  choose  a  topic  and  create  a  reading  list.  One  option,  which  I  recommend,  is   to  write  an  empirical  paper  by  collecting  and  analyzing  a  data  set.  Another  option  is   to   propose   a   new   theoretical   model   and   analyze   equilibrium   properties.   We   will
discuss  a  few  term-­‐paper  ideas  during  class.  Some  selective  students  with  promising   projects  will  have  chances  to  present  in  the  class  and  get  extra  credits.
Topics  to  be  covered  (Subject  to  change)
I.
Market  structure
1.
Intro   &   Review.   Technology   and   Costs.   Perfect   competition.   Monopoly.
Measuring  market  power.
2.
Imperfect   (oligopolistic)   Competition.   Introduction   to   game   theory.   Static   games.   Nash   Equilibrium.   Prisoner’s   dilemma.   Cournot   model.   Bertrand   model.   Capacity   constraints   in   price   competition.   Extensive   form   games.
Subgame  perfect  equilibrium.  Stackelberg  model.
3.
Cartels  and  collusion.
II.
Firm  practices
1.
Incumbent   advantage.   Incumbent   advantage.   Limit   pricing   and   credibility.
Dixit  model  of  capacity  investment.
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2.
Product   differentiation.   Product   differentiation   resolves   Bertrand   paradox.
Spatial  Competition.  Pricing,  Location  and  Entry.
3.
Price   discrimination.   Perfect,   2nd-­‐degree,   3rd-­‐degree   price   discrimination.
Nonlinear  pricing  and  bundling.  Application:  post-­‐patent  drug  price  anomaly.
4.
Vertical   integration   and   vertical   restraints.   Vertical   Externalities   (Double
Marginalization,   Downstream   Moral   Hazard).   Vertical   integration   and   vertical   Restraints   (Exclusive   Territories,   Tie-­‐In,   Resale   Price   Maintenance,   etc.).
III.
Information  economics
1.
Price   dispersion   and   search.   Price   dispersion   for   homogeneous   products.
Diamond   paradox.   Equilibrium   price   dispersion   with   costly   search.
Applications:  online  books,  gasoline  markets.
2.
Auctions.  Games  of  incomplete  information.  Bayesian  equilibrium.  First-­‐price   auctions,  second-­‐price  auctions.
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